Response by HopingForChange:

It seems that your perspective as a real estate flipper has been flushed out. It perhaps also adds some color as to why you think in the narrow black-and-white mindset. You have given me little reason to believe that your knowledge of real estate finance is much more than a bit of this and that.

My impression of most of the folks who engage in this flipping activity are mostly amateurs and many of them feel shut out of the wider markets and more sophiisticated investments— because they lack skills and knowledge. If you fit into that category, I don’t know for sure.

It sure doesn’t impress me when you claim to have made a ton of money on one or more real estate transactions in the past. There are plenty of stock market day traders who make the same claim who have little idea about he risk they are taking. It’s more gambling than investing. Real estate flipping is also highly risky and now the folks who have been doing it have been crushed.

FYI. I retired from a career in real estate and mortgage finance. I know an amateur when I see one.

Although I love to debate folks on real issues, it seems that now you identified and even defending yourself as a flippitey flipper, I think I can find folks more worthy of arguing with. Thanks for the exchange.

I don’t have a clue where you fit on the political spectrum, but it really doesn’t matter. Whether or not the Democrats intervene in punishing lenders and/or bailing out borrowers is a different issues from what I am telling you in this note. But I hope you will do something to broaden your knowledge about real estate finance, credit standards, and the underwriting practices. It might be helpful.

As an example, I am really wondering if you did comprehend my comment about the “flippers” now driving a major share of foreclosures. While you jumped to the defense of the investor group of folks who buy properties that are in bad shape and they invest sweat equity to improve them, you missed the boat on the nature of another group of “flippers” that is actually being foreclosed in great numbers.

A typical “flipper” now in foreclosure bought brand new property in markets such as Miami, Phoenix, or Los Vegas. The game was that the property could be bought and sold at a quick profit because prices kept rising. For a few years running, a condo complex in Miami would be built and 90% sold to flippers who then dumped the properties at a profit. They did the flip for a few years and made money.

But when the system failed, now we have condo buildings in Miami that are 90% empty and the few real owners of units pay all of the maintenance while the “flippers” went in to default and foreclosure. Maybe you want to defend these short term flippers who add no value and even bail them out with government money, but I don’t.

But I am also astounded that you apparently think you understand how the finance world works in such black and white terms. You might note that there is a huge financial crisis going on these days with major players that was triggered by a lot of bad judgement on the part of the lenders. This financial meltdown is mostly the fault of the lenders……and the investment bankers who enabled loans exceeding 100 % of value. Mortgage bankers added piggy back second mortgages full well knowing they couldn’t be paid back, but the monkey was off of their back as soon as the loan was sold to an investor (many of them were foreign investors.)

Here is a basic question: If I (or someone else) put together a college level test about residential real estate finance covering subjects such as underwriting, interest rates, risk spreads and non-conforming loan funding ….would you pass or fail?

No doubt you have already an opinion about your level of knowledge about this stuff. But, in my opinion, nobody else who reads your posts can be too sure about it.

For myself, I am learning new things everyday in a Wall Street financial meltdown triggered by sub-primes that has carried internationally to off balance sheet structures at major banks which threaten the world’s financial system. I learned about the shaky practices in lending in the UK where Northern Rock wasn’t protected from its demise with the type of banking regulations that the US enacted after the S&L crisis in the 80’s.

FYI. The mortgage situation in the UK is much worse than it is in the US. Few borrowers in the UK borrowed at fixed rates because the UK doesn’t have the likes of a govenment sponsored GNMA that probably guaranteed the your 30 year fixed conventional loan. But, of course, you probably knew all or most of this before I posted it.

Regulation and government involvement in this stuff is necessary and much more complex than you probably ever imagined.
Don’t jump to conclusions too fast before we get all of the facts about why the mortgage system has melted down. The S&L crisis of the 80’s led to some necessary banking reforms. No doubt we will learn a great deal about the current mess in the future so it can be fixed on a bi-partisan basis in Congress.

Its not that complex. Either you can read the terms of your contract, or you cannot.

If the contract says that your loans interest rate will “RESET” in 2 years and you’ll be paying more, I don’t know whats so complicated about that.

Either you’re prepared to pay it, or you’re not.

Response:

You really think that a reset rate is so completely black and white– I suppose????

Let’s say you personally took out an option arm with interest only terms (and variable levels of principal paydown or even negative amortization) and a 2/28 step up rate. Do you think you would really know the step up payment required two years in advance?

Before you answer the question, I think you need to have a great deal of ability to predict the most indexed option arm rate, which is the London Interbank Offered Rate (Libor)

My view is that its pretty damn hard to know if you are prepared to pay for a step up to any indexed rate in advance especially considering that it is Libor. And it matters not if you have an MBA.

It seems that the banking system in Europe is now so shaky that banks are afraid to lend to one another and so Libor is quite high. It takes more than an economist with any Ivy League degree to predict this stuff with any certainty and much more than the average borrower.

Good to know, however, that you got a 30 year fixed conventional mortgage and didn’t take the risk of getting an ARM as was recommended by Alan Greenspan a few years ago. The mortgage you have is pretty simple in contrast to an I/O option ARM and no doubt that could influence your view on this stuff.

I suspect that most people who own fixed premium whole life insurance contracts would have a great deal of difficulty in understand variable premium universal life insurance contracts………its a whole different level of complexity

and #7 above…shame on you.

Greedy loan officers with MBAs=Drug dealers/suppliers

Uneducated, low income customers=Drug users

Who’s the professional here? Who has the ability to inflict harm on America’s economny? With “liberal and proud’s” outlook, screw the entire country because of a few hundred thousand uneducated people wanting the “American Dream” and shame on them.

The ultimate foe in this are the greedy mortgage lenders/officers. Fudging paperwork to make a few thousand dollar commission, not the people being handed homes they can’t afford. They do bear some responsibility, but please…if the mortgage lenders HAD DONE THEIR JOB America wouldn’t be experiencing this.

Period.

Lenders were giving people with lower credit scores and incomes a chance to acheive the American dream. You buy a house, then you spend your life figuring out how to pay for it. Poor people do it all the time, and make ends meet. So lenders are giving those people a chance.

Response (written by HopingForChange):

Yup. You are dead right in that some cases of mortgage lending, we had people who were being given “a chance.”

Maybe you didn’t intend your statement to be interpreted this way, by my view is that the “giving people a chance” perspective is a gross oversimplification.

My response therefore hopes to add to the understanding of the type of mortgage origination complexity we are dealing with in debating how much the govenrment and regulators should be involved.

Unfortunately, much more has now been exposed about the lending origination practices at Ameriquest, Option One, and Countrywide Financial, New Century etc. and it went way beyond giving “people a chance.” These firms were not banks under lending laws that regulate banks and lastly they had no fiduciary duty to the customer.

I personally think it is pretty damned dangerous to draw conclusions about millions of folks who will face foreclosure because their specific circumstances may all be quite different. This global problem just can’t be understood without looking granularity of these loans.

My understanding is that about one half of the foreclosures in my market area are being conducted on “flippers.” These are investors who hoped to make a quick buck. I haven’t got much sympathy for this ‘flipper”group and I hope that the Bush administration doesn’t do anything to help them.

But the other half of foreclosure activitiy is a very mixed bag.

Most consumers take out loans without knowing the right questions to ask. Many of the folks being now forclosed upon are lower income and much less educated and less able to understand the complex mortgages they were being sold. There are very few knowlegdable consumers who exist when it comes to complex option ARM mortgages tied to Libor interest rates. Do you actually know anybody who studied a pile of mortgage documents before signing them????

It is worth noting that about 20% of sub-prime loans were made to borrowers who could have qualified for a conventional loan. Irresponsible loan officers, however, pushed option Arms only requiring stated income that came with a big prepayment penalty that goosed up the prospective yeild to investors. The loan officers were making out like bandits….some earning a 4% commission on a half million dollar loan would get $20,000 for salesmanship and a bit of paperwork. Profits for these non-conforming loans were huge.

In some cases, I suspect that there were some borrowers who knew what they were getting into and loved the idea of an option Arm because it meant they could buy luxury cars and take trips to Vegas. This is the “don’t worry, be happy crowd” and government regulation isn’t likely to alter their behavior.

But a big share of sub-primes were made to the financially illiterate working poor and otherwise unfortunate folks who had no clue what would happen when a rate re-set happened. They were victims of an unregulated free-enterprise-commision- driven- mortgage-lending- industry. The Bush administration and the Fed and the Treasury let this disaster happen.

The CEO of Countrywide now says that the system would not have gone bust if housing prices kept rising. My view is that, in time, we wil find that a virtually unregulated mortgage lending industry (operating away from the oversight of banking regulators) who were so slick that they made disasterous underwriting decisions and knowingly lent money to borrowers who couldn’t pay it back…..UNLESS HOUSING PRICES KEPT RISING.

Guess what? The rising price scenario didn’t play out. Where were the consumer protections…..they simply didn’t exist. It’s sad. A hard lesson to learn when a home purchase blows up. Free enterprise thinking and market driven practices produced a terrible result for some segment of the foreclosed consumers. We just can’t globalize their indivdual circumstances and come up with a “one size fits all” solution when it applies to government involvement and or regualtion needed.

It always interesting to note the comments of folks like Cheney (and Bartlbee) who claim to oppose “bailouts.” My perception is that folks who oppose bailouts might actually have differing views depending on who is being bailed out.

I guess that Cheney doesn’t like goverment “bailouts of stupid borrowers”, but he and Greenspan don’t seem to be opposing government intervention in “bailing out the lenders.” Now we have the government sponsored Federal Home Loan Bank heavily funding a formerly free-wheeling and irresponsible lender in Countrywide Financial. A few weeks ago, Hank Paulson of the Treasury Dept was instrumental in cajoling competitor banks into helping Citigroup with a super SIV fund. This isn’t exactly free-enterprise at work leading to the reported goal of Cheney to keep the government out of private business matters. Now that a goverment sovereign fund of AbuDhabi is going to bailout Citibank with a $7.5 billion capital infusion making a foreign government the largest shareholder in our largest financial institution.

It seems that even the most hardline right wing conservatives can’t find a way to keep governments out of the way in letting free enterprise operate. Not even at solving the Republican era free-market, low regulation, financial system approach that has now gone very much out of whack. Despite the fact that conservatives such as Cheney and Greenspan have noble intentions, their hard held convictions and judgements can be way off base and do significant harm to the USA as we now have learned the hard way.

And, I agree that in a way it’s not fair. Paul is a straight-ahead libertarian as opposed to a corporatist. He’s a “true believer” as opposed to someone using the philosophy to enhance corporate power. So, in a way, it was a strawman argument. But, I still don’t agree with his philosophy, even if he’s an honest man.

Touchy, touchy. I’m not TRYING to prove anything and to say I don’t agree with Paul is not the same as “proving that he’s wrong.” He doesn’t like any regulation of capitalism. I don’t agree with that approach. He doesn’t believe in labor laws or minimum wage laws. If he could, he would dismantle the EPA, the Dept. of Education, the FAA, FCC, the CDC and stop funding for things like public libraries. He even advocates privatizing the nations highways into toll roads. I just don’t agree with any of that because I don’t agree with the central tenets of modern libertarian philosophy – that’s all.

Comment by Ret. Col. Jack Ripper

So says YOU. Strawmen arguments are BS. And you using them is really a shame. Or maybe Ron Paul just isnt a Libertarian. Either way you have not proven anything to me about how Ron Paul has been wrong about anything.

NEOCONED… and the progressives never brought up this video that I noticed over the past several years… why is that? Ron Paul was correct. We should have listened to him then… This stuff is all related and has a cure…the Constitution.

http://www.youtube.com/watch?v=aewpvcxAwTk

See, this is exactly what I’m talking about when I say “dogma.” We’ve just seen what happens when lenders “make their own adjustments if left alone” without regulation and it’s a disaster. But, you’re still pretending that it works. And your libertarian friend, Gibson asked me if I’ve been asleep for the last few years. Amazing.

Dry up the flow of monies that is keeping our economy going.”

If that were true, then we would have seen dried up capital markets during times of regulation and liquid markets during times of deregulation. But, the opposite is true. Unregulated periods have always led to the collapse of capital markets – unless, of course, you can give me an historical example.